PBOC Leaves Loan Prime Rates Unchanged In December

TOKYO (Dec 20): Japan’s core inflation accelerated in November as rising food and fuel costs hit households, data showed on Friday, keeping the central bank under pressure to raise interest rates.

The data, which came in the wake of the Bank of Japan’s (BOJ) decision to maintain interest rates at 0.25% on Thursday, highlights broadening inflationary pressure that could prod the bank to raise borrowing costs further.

Renewed yen declines could pressure prices higher by pushing up import costs. The BOJ’s decision to stand pat and BOJ governor Kazuo Ueda’s dovish comments drove the dollar to a five-month high of 157.80 yen (RM4.50)7 on Friday.

The nationwide core consumer price index (CPI), which includes oil products but excludes fresh food prices, rose 2.7% in November from a year earlier, government data showed, roughly in line with a median market forecast for a 2.6% gain.

It accelerated from a 2.3% rise in October due partly to stubbornly high prices of rice and the phase-out of government subsidies to curb utility bills.

"November’s surge in inflation wasn’t a surprise," Capital Economics wrote in a research note. "The Bank of Japan will have known it was on the cards when it decided not to hike rates yesterday. But it should add to the bank’s confidence that it can resume rate hikes over the months ahead," it said.

A separate index that strips away the effects of volatile fresh food and fuel, scrutinised by the BOJ as a better gauge of demand-driven inflation, rose 2.4% in November from a year earlier after a 2.3% gain in October.

Service-sector inflation was steady at 1.5%, in a sign firms continued to pass on rising labour costs, the data showed.

The BOJ ended negative interest rates in March and raised its short-term policy rate to 0.25% in July, on the view that Japan was on the cusp of durably achieving its 2% inflation target.

It has stressed the BOJ’s readiness to raise rates again if Japan continues to make progress in durably achieving its price target, backed by domestic demand and sustained wage gains.

Ueda said on Thursday that the BOJ needed more information to hike rates again, stressing the need for clarity on next year’s wage growth and incoming US president Donald Trump’s economic policies.

"Given the (BOJ’s) assessment that import price rises are subsiding, it’s hard to expect the BOJ to hike rates in January," said Naoya Hasegawa, chief bond strategist at Okasan Securities, who projects a hike in March. "Most market players likely viewed Ueda’s news conference as quite dovish," he said.

Source: Theedgemarkets

The NZD/USD pair remains under selling pressure around 0.5625 during the Asian trading hours on Friday. The deep recession in New Zealand fueled the Reserve Bank of New Zealand (RBNZ) rate cut bets, which undermine the Kiwi.

The weaker-than-expected New Zealand’s Gross Domestic Product (GDP) data for the third quarter raised the risk of further large-scale interest rate cuts from the RBNZ. The markets have priced in a 91% chance of another 50 bps RBNZ rate reduction in February. 

”It supports the Reserve Bank getting on with official cash rate cuts and getting the OCR back to a more neutral level more quickly than they were anticipating in the November monetary policy statement,” said Harbour Asset Management fixed income and currency strategist Hamish Pepper.

On the other hand, the hawkish rate cut by the Federal Reserve (Fed) on Wednesday lifts the USD and contributes to the pair’s downside. During the Press Conference, Fed Chair Jerome Powell made clear that the Fed is going to be cautious about further cuts. Later on Friday, investors will monitor the release of the US Core Personal Consumption Expenditures (PCE) Price Index data, which is expected to show an increase of 2.9% YoY in November. 

New Zealand Dollar FAQs

What key factors drive the New Zealand Dollar?

The New Zealand Dollar (NZD), also known as the Kiwi, is a well-known traded currency among investors. Its value is broadly determined by the health of the New Zealand economy and the country’s central bank policy. Still, there are some unique particularities that also can make NZD move. The performance of the Chinese economy tends to move the Kiwi because China is New Zealand’s biggest trading partner. Bad news for the Chinese economy likely means less New Zealand exports to the country, hitting the economy and thus its currency. Another factor moving NZD is dairy prices as the dairy industry is New Zealand’s main export. High dairy prices boost export income, contributing positively to the economy and thus to the NZD.

How do decisions of the RBNZ impact the New Zealand Dollar?

The Reserve Bank of New Zealand (RBNZ) aims to achieve and maintain an inflation rate between 1% and 3% over the medium term, with a focus to keep it near the 2% mid-point. To this end, the bank sets an appropriate level of interest rates. When inflation is too high, the RBNZ will increase interest rates to cool the economy, but the move will also make bond yields higher, increasing investors’ appeal to invest in the country and thus boosting NZD. On the contrary, lower interest rates tend to weaken NZD. The so-called rate differential, or how rates in New Zealand are or are expected to be compared to the ones set by the US Federal Reserve, can also play a key role in moving the NZD/USD pair.

How does economic data influence the value of the New Zealand Dollar?

Macroeconomic data releases in New Zealand are key to assess the state of the economy and can impact the New Zealand Dollar’s (NZD) valuation. A strong economy, based on high economic growth, low unemployment and high confidence is good for NZD. High economic growth attracts foreign investment and may encourage the Reserve Bank of New Zealand to increase interest rates, if this economic strength comes together with elevated inflation. Conversely, if economic data is weak, NZD is likely to depreciate.

How does broader risk sentiment impact the New Zealand Dollar?

The New Zealand Dollar (NZD) tends to strengthen during risk-on periods, or when investors perceive that broader market risks are low and are optimistic about growth. This tends to lead to a more favorable outlook for commodities and so-called ‘commodity currencies’ such as the Kiwi. Conversely, NZD tends to weaken at times of market turbulence or economic uncertainty as investors tend to sell higher-risk assets and flee to the more-stable safe havens.

Source: FXSTREET

The BoE delivered a dovish vote split but continues to emphasise a gradual approach to reducing the restrictiveness of monetary policy. We think this supports our base case of the next cut coming in February and a quarterly pace thereafter.

The market reaction was modest with Gilt yields tracking slightly lower and EUR/GBP moving higher.

As expected, the Bank of England (BoE) decided to keep the Bank Rate unchanged at 4.75% yesterday. The vote split had a dovish twist with 6 members voting for an unchanged decision and Dhingra, Ramsden and newcomer Taylor voting for a 25bp cut.

The BoE retained much of its previous guidance noting that “a gradual approach to removing policy restraint remains appropriate” and that “monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further”. The MPC now judges that the labour market is “broadly in balance” and has similarly revised its expectation for Q4 growth down from 0.3% q/q to no growth as a reflection of the latest weakening in growth indicators. We also note that in the unchanged camp of the MPC, one member considered that a more “activist strategy” could be warranted, hinting at a more dovish shift in the centrist camp.

Given the recent topside surprises to wage and inflation data combined with an expansionary fiscal stance, we think a continuation of a gradual cutting cycle is warranted. We therefore adjust our call, expecting quarterly cuts in 2025 at the meetings associated with updated economic projections. We expect the next 25bp cut in February with the Bank Rate ending the year at 3.75% (prev. 3.25%). We maintain our terminal rate forecast unchanged at 2.75% but expect it to be reached by Q4 2026 (prev. Q2 2026). However, we highlight that the risk is skewed towards a swifter cutting cycle in the first half of 2025, as highlighted by the MPCs communication yesterday.

Rates. Gilt yields moved lower across the board on the dovish vote split but overall, the reaction was muted. Markets price 18bp worth of cuts for February and 55bp by YE 2025. We highlight the potential for BoE to deliver more easing in 2025 than currently priced, expecting a cut in February and a total of 100bp worth of easing in 2025.

FX. EUR/GBP moved higher on the announcement with the dovish vote split taking centre stage. The still cautious guidance delivered yesterday highlights the more gradual approach of the BoE compared to European peers. We think this supports our case of a continued move lower in EUR/GBP. This is further amplified by relative UK economic outperformance and tight credit spreads. The key risk is a soft BoE.

“Technically, this is still a dip until Weekly levels are confirmed as lost,” they said.

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